City Made $8.6 Million Debt Mistake
Past Comptroller blamed. Mistake equivalent to all the salaries of health department staff.
In 2009 and 2010, the City of Milwaukee issued $49.3 million in bonds for Milwaukee Public Schools construction expenses. The move, one used many times, allowed MPS to take advantage of the city’s credit rating and debt management expertise to borrow money cheaper than it could have on its own. To pay off the debt, MPS would just need to make annual payments to the city.
MPS has been making those payments since 2013, totaling $21.15 million through 2019. But somewhere along the way the Comptroller’s Office failed to earmark the funds, needed for balloon payments to retire the debt in 2025 and 2027. The city began spending the money to pay off other debt.
Now, the cash-strapped city will need to use $8.6 million of its approximately $300 million property tax levy to catch up. The one-time charge is equivalent to the cost of salaries for every employee of the Milwaukee Health Department.
The budget office, a separate entity, noticed the fund was growing substantially and sought to reduce the amount transferred into the fund annually. The 2020 budget calls for $267 million in debt service costs, of which $73.5 million comes from the property tax levy. “We had asked the question for several years and the Comptroller wasn’t able to find the reason for why the fund balance was high,” said budget director Dennis Yaccarino to members of the Common Council’s Finance & Personnel Committee on Wednesday. “We were concerned with the levels withdrawn.”
“When the Comptroller found out there was this balloon payment we slowed it way down,” said Yaccarino. The issue was discovered in 2019.
Newly-elected Comptroller Aycha Sawa, who has worked in the office since 2010 and served as deputy starting in 2017, said she didn’t work directly with debt prior to being elected, but that the office must accept the blame.
“We accept this oversight on behalf of the Comptroller’s management team,” said Sawa. She said financial reporting, budgeting and debt management were all functions handled by different divisions of the 59-employee office. “We have done our due diligence and created a better process internally.”
But that didn’t thrill members of the committee, notably the chair.
“Let’s be clear, this adds a tax levy at probably the worst possible time,” said Alderman Michael Murphy. “The city budget is already strained by budget shortfalls due to the pandemic.”
“As far as I can tell this is a one-time change in the debt budget that shouldn’t occur in the future,” said Yaccarino.
But Sawa said this: “For future years, the fund balance is determined on a lot of different factors and that plays into different market factors, so that’s something we can’t 100 percent speak to right now.”
“So that contradicts what Dennis just said, but okay,” said Murphy.
Yaccarino said the fund might never be replenished to its prior high. “Building up a super large fund balance is not going to help us in the future,” said Yaccarino. He said it reached $70 million around 2013. “I think right now we have $12 million in the fund balance. That is a decent amount to have going forward. The idea is to keep it positive.”
“When we look at the past levels they were way too high and we were overtaxing for debt,” said Yaccarino.
“If they were way so high, why didn’t you find the problem sooner?” said Murphy of the missing earmark.
“That’s because the comptroller’s office never communicated that to us until last year,” said Yaccarino.
Murphy asked why the comptroller’s office didn’t find it.
“That’s something I can’t specifically speak to as I began looking at this in 2019,” said deputy comptroller Joshua Benson. He’s worked for the city since 2017.
Sawa placed the blame on Matson. “Our previous Comptroller, Comptroller Matson, was overseeing debt. He made a lot of the ultimate decisions. I would say it was under him,” she said.
Debt associated with tax incremental financing, where upfront borrowing is repaid by increased property tax revenue from specific properties, was also moved into its own fund. Approximately $31 million will be transferred to retire TIF debt in 2020.
“I think the ballon payments snuck up on us,” said Yaccarino.
The 2020 budget reports that the city retires approximately $70 million of debt annually. The city holds debt on its books for everything from sewers and roads to Miller Park, the latter of which it receives an annual payment of $1 million to offset. Since 1989, the city had provided MPS with $182.3 million in borrowing. The district provides the city with approximately $8 million annually to pay off its bonds.
As of late 2019, the city maintains credit ratings of AA- from Fitch and S&P Global. Benson said the rating agencies formulas had placed it on a downgrade watch before this issue was discovered. Ald. Nik Kovac called for models on what the city could do, including increasing the debt service fund, to improve the ratings.
The city, which can’t increase its property tax levy by more than the value of new construction under state law, is scheduled to spend over 58 percent of its $291 million property tax levy on pension and debt service costs. That’s up from 54 percent in in 2018 and 55 percent in 2019. Coupled with other revenues, including funds from parking, the Milwaukee Water Works and fees, the city has an approximately $637 million general fund and $1.6 billion budget.
Mayor Tom Barrett is scheduled to introduce his 2021 executive budget proposal on September 22nd. The Common Council is scheduled to adopt a final budget in November.
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Read more about 2021 Milwaukee Budget here